In June 2019, the Financial Action Task Force (“FATF”) issued a guidance document that subjects the crypto industry to the same compliance standards as financial institutions. The Open VASP Initiative from Crypto Valley wants to comply with this regulation as efficiently as possible.
One of the most controversial and challenging measures was the application of the “Travel Rule” to all vendors of virtual assets (“VASPs”). While the FATF rules serve as guidelines for the world’s regulators, nations that do not comply run the risk of being blacklisted. The FATF will begin to review how the rule has been applied among its members by June 2020.
The VASPs’ compliance with the travel rule could go somewhat against the whole crypto-philosophy. On the other hand, the application of the “Travel Rule” could also have a positive effect. For example, it could strengthen the trust of institutional actors and thus pave the way for a broad acceptance of crypto-assets.
Two problems complicate the task
Since the 2019 ruling, crypto companies have been trying to find out how the “Travel Rule” can be implemented in practice. Two main problems stand out: the identification of the beneficial owner and the data transfer.
The OpenVasp initiative was launched in November 2019 by Bitcoin Suisse, Lykke, Seba Bank, Sygnum, Avaloq and MME with the support of the Crypto Valley Association (CVA) and the International Digital Asset Exchange Association (IDAXA). The aim of the initiative is to help the crypto industry comply with this FATF guideline. The aim is to create a compliant industry standard. The Open VASP Initiative started as a working group and has been registered as an association in Zug since March 27th. The goal is to establish an open and decentralized protocol as proposed in the OpenVASP white paper. A SWIFT-like messaging system based on cryptography.
The “Travel Rule” refers to the transmission of sender and receiver information in value transfer transactions. It will now also apply to transactions of crypto assets between VASPs and other “obligors”. So-called “virtual asset service providers (VASPs)” are to operate in accordance with the guidelines issued. The recommendations are strongly based on the regulation of traditional banking business. Under the so-called “Travel Rule”, transfers over USD 1,000 must contain information on the sender and the recipient. This information must be passed on to the receiving financial institution.
The “Travel Rule” poses considerable challenges for players in terms of compliance with the regulations and simultaneous consideration of data protection
The OpenVASP initiative tries to provide a clear picture of FATF compliance. This is based on an open source protocol that enables secure communication of sender and beneficiary information in crypto-asset transactions. The OpenVASP protocol is a decentralized protocol with strong end-to-end encryption of personal data that preserves and protects the “anonymity” of customer data. It is designed to be technology independent, fully decentralized and extensible so that it can be adopted by VASPs of any size with multiple implementations and at minimal cost on a broad basis. The first version was developed in C# with Lykke business and Bitcoin Suisse AG. EPAM Systems, a global leader in digital platform engineering and development services, recently joined the association as a member and is developing the Java version of the protocol. Other Crypto Valley companies, such as 21 Analytics, are also working on solutions for implementing Open VASP and other open protocols
The addressing and authentication parts of the OpenVASP protocol use Ethereum’s distributed public key infrastructure. This means that VASPs must use a smart contract that represents the identity on the blockchain. By using smart contracts on Ethereum, a block chain directory with public keys for the VASP and an IBAN-like numbering format is created: the Virtual Asset Account Number (VAAN).
Open VASP in regular contact with FATF regulatory authority
The Open VASP Association plans to conduct the first “real-life” tests of the protocol in May and to make an official version available in June.
The OpenVASP Association is in regular contact with VASPs, banks, stock exchanges, organizations and other associations that are interested in becoming members. It strives to welcome as many new members as possible. It strongly supports the principles of the free and open market and has started working on interoperability. Some of the industry leaders are also developing solutions for the Travel Rule.
OpenVasp, based in Zug, Switzerland, was founded to help the entire crypto industry comply with the “travel rule” following the latest FATF and FINMA guidelines. Their goal is to have a first working version of the protocol in place by June 2020.
*Originally published in German at CVJ.ch